Praxeology and Prediction
[UPDATE: It was not until I pushed this post out on Twitter that I realized I should have called it, “WHY DID THE ECONOMIST CROSS THE ROAD?” Ah, life is full of regrets.
But seriously, that is a clever title for this content, beyond the obvious.]
I am in the middle of a lot of “day job” projects and can’t devote the full time to this post that it deserves. The context is that Milton Friedman famously said in economics, models need to make testable predictions, otherwise we are not being scientific but instead are engaged in spinning out mere tautologies.
Mises and many of his followers reject this strongly, thinking that economic laws should be deduced logically from the axiom of human action.
OK now to my anecdote: To walk from my apartment to my office at Texas Tech, I have to cross a busy street that has 4 total lanes, with a divider in the middle. So in the morning when it’s busy, what usually happens is that I wait for a break on my side of the street, I walk to the middle and hang out on the divider, and wait for a break in the traffic going the other way to get totally across the street.
The rub is that there’s a gap in the divider, so that cars going one way on the street are allowed to do a U-turn through the gap, so that they can effectively get onto the other side of the big street, going the other way.
Anyway, yesterday it was really busy. I made my way across the first two lanes of traffic, and I was hanging out on the divider. I saw a car turned right onto the busy street (behind me), drove up past me on my right, and then was waiting “in” the gap in the divider (about 20 feet in front of me), trying to turn left.
The driver of that car and I were *both* waiting for the oncoming traffic to give us an opening, so that I could cross and the driver could make the turn. Now normally in this situation I have to be careful, because if a car is pulling a U-turn, then obviously it will be heading straight for me if I’ve also entered the road (jaywalking across the remaining two lanes).
But I was very confident that the car would NOT pull a U-turn, but instead would make a 90-degree left turn and go straight through to the side street that intersected the busy 4-lane road.
How did I “know” this? Because I realized that if the driver pulled a U-turn, it would simply bring him back to where he had been a few minutes ago. In other words, had the driver wanted to get to where the U-turn would place him, it would have been dumb for him to turn right onto my busy street in the first place. He should’ve kept going straight.
Now granted, this wasn’t a prediction on the order of astronomers telling us where to find Halley’s comet. But I *was* right. The driver *didn’t* pull a U-turn, and I was able to cross the street. (By the way, I made sure the driver wasn’t turning. I didn’t stake my life on my prediction.)
One last thing: Notice that my prediction, based on “getting inside the head” of the other acting being, was way more tractable than if I had asked a bunch of neurobiologists to analyze the state of the driver’s brain stem and predict the physical movements of his feet and hands. My knowledge of praxeology allowed me to navigate in the real world a lot better than the natural sciences alone would have allowed.
Spillover Bias in Contiguous County Approach
Daniel Kuehn has a very interesting new paper on possible spillover bias when using a “contiguous county” approach in economic analysis. For example, this is the approach in the influential Dube et al. (2010) minimum wage paper, which Paul Krugman for example singled out as epitomizing the new research that overturned the old view about the minimum wage hurting teen employment.
(For a discussion of the various twists and turns in the debate, see my EconLib summaries here and here.)
The basic logic of Dube et al. (2010) is that traditional panel data studies erroneously took one region of the US as a good “control” for every other region. Sure, they’d control for things like the national unemployment rate, but if there were local trends that just so happened to hit states that raised their minimum wage, then it would falsely bias the estimated coefficient on the minimum wage variable. (I’m making this up, but: Suppose only the Rust Belt states were the ones that raised the minimum wage above the federal level. Then a nation-wide panel data approach covering the years 1960 – 1990 might conclude that the minimum wage caused serious job losses [particularly in manufacturing]. But that would be overestimating the harm of the minimum wage.)
So to correct for that potential problem, Dube et al. instead construct pairs of contiguous counties that straddle a state border. Thus when we run the regression, each county is only being directly compared with a contiguous county that may have a different minimum wage. Any regional differences are thus assumed to be washed out, because a county in (say) Michigan is only being compared with other counties that are also in the Rust Belt.
What Daniel does in his paper is show that construction of pairs of contiguous counties might not be the perfect control group after all. If county A is in a state that raises its minimum wage, while adjacent county B is in a state that doesn’t raise its minimum wage, then we can’t simply look at the growth in employment in the two counties to assess the impact of the minimum wage hike. This is because workers are allowed to cross state borders, and so commuter flows might change in response to the minimum wage hike in county A, giving a false impression of the effect.
The following is MY illustration of what Daniel is talking about. (Note that in practice Daniel found that Dube et al.’s approach UNDERstated the harmful effects of the minimum wage, but in principle it could’ve gone the other way. I’m going to flesh out how their approach could understate it, but the following is my explanation, which Daniel might not endorse.)
Suppose county A has 9,000 teenage workers with a bad work ethic and 1,000 teenage workers with a great attitude. County B has the same. Initially neither county has a minimum wage. Every worker is employed. Specifically, the bad workers earn $5/hour and the good workers earn $7/hour.
Now county A imposes a new $6/hour minimum wage. The firms in county A lay off lots of the bad workers, and they bid up the wages of good workers, as they re-staff their operations. The firms in county B respond to the changes in worker availability.
In the new equilibrium, county A’s *employment* (not residence) is now 8,000 bad workers and 1,500 good workers, while county B’s employment is 10,000 bad workers and 500 good workers. In both counties, the good workers earn $8/hour. In county A, the bad workers earn $6/hour, but in county B, they earn $4/hour.
So if we “naively” looked at these numbers, without considering the commuter flows, we would conclude that the imposition of a $6/hour minimum wage caused county A to lose 1,000 teenage jobs relative to county B: namely, 9,500 teenagers vs. 10,500 teenagers.
However, if originally BOTH counties A and B had imposed $6/hour minimum wage laws, then maybe the new equilibrium would look like this: Both would have 7,000 bad workers earning $6/hr, and both would have 1,000 good workers earning $9/hour. (Don’t read too much into the specific employment and wage levels; I don’t have a full-blown model in my mind. Maybe some of these numbers don’t make sense, I’m just trying to show the potential problem.)
So in this case, it’s clear that the “real” impact of the minimum wage is to reduce teen employment in a given county from 10,000 down to 8,000, meaning a loss of 2,000 teenage jobs per county. But when we only applied the minimum wage to one county and used the adjacent one as a “control,” the commuter response made us erroneously conclude that the minimum wage would only cost 1,000 teenage jobs for a given county. I.e. the contiguous county approach, in this contrived example, would make us conclude that the minimum wage’s harm was half of its true value.
Economists Critique Trump’s Industrial Policy
On Thanksgiving, while most Americans were drinking beer and watching football, Donald Trump was hard at work keeping jobs in America!!
When word came out that the company Carrier would in fact keep its operations in Indiana, rather than outsourcing, naturally the Trump forces claimed victory. But Justin Wolfers on Twitter was horrified:
Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay. Great economic policy. https://t.co/t2WAJOgh8F
— Justin Wolfers (@JustinWolfers) November 30, 2016
Notice he got 6,400+ retweets. Obviously, lots of Trump critics agreed with Wolfers’ assessment.
Then along comes Tyler Cowen, who had this to say about the affair in Bloomberg:
When an American company “moves jobs to Mexico,” it doesn’t disassemble a factory and load all of the parts onto border-crossing trucks. That might be relatively easy to stop. Instead, the company closes or limits some U.S. production while expanding or initiating new production south of the border. Given that reality, how is government supposed to respond?
…
Perhaps most importantly, a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be.
Another good argument, right?
Now notice something interesting. If you hate Trump, and especially if you’re an economist, I bet you nodded your head at *both* Wolfers’ critique and Cowen’s.
And yet, they are saying opposite things. They can’t both be right. (Wolfers is saying Trump just opened up a new subsidy for domestic manufacturers, such that they’ll even *fake* that they want to outsource. Cowen is saying Trump just opened up a new method of oppressing domestic manufacturers.) If you thought they both showed different reasons that Trump’s behavior is dumb, then you suffer from confirmation bias.
P.S. I think Trump’s behavior vis-a-vis Carrier is dumb. But I at least have enough introspection to realize that Wolfers and Cowen can’t simultaneously be right.
Lara-Murphy Show on *The City of God*
Sorry for the hiatus, my travel schedule the last two months has been pretty crazy. Carlos and I have released another episode of our podcast. It’s definitely not your usual fare; we talk about his latest reading, Augustine’s *The City of God*.
The WaPo’s Absurd Conspiracy Theory About Conspiracy Theorists
Everybody and his brother has made fun of this recent WaPo piece. In case you missed it, here’s the punchline:
The flood of “fake news” this election season got support from a sophisticated Russian propaganda campaign that created and spread misleading articles online with the goal of punishing Democrat Hillary Clinton…say independent researchers who tracked the operation.
Russia’s increasingly sophisticated propaganda machinery — including thousands of botnets, teams of paid human “trolls,” and networks of websites and social-media accounts — echoed and amplified right-wing sites across the Internet as they portrayed Clinton as a criminal hiding potentially fatal health problems and preparing to hand control of the nation to a shadowy cabal of global financiers…
Two teams of independent researchers found that the Russians exploited American-made technology platforms to attack U.S. democracy at a particularly vulnerable moment…The sophistication of the Russian tactics may complicate efforts by Facebook and Google to crack down on “fake news,” as they have vowed to do after widespread complaints about the problem.
But now for my contribution to the discussion. Others have alluded to the hypocrisy, but I don’t recall seeing someone literally quote the following:
The Russian campaign during this election season, researchers from both groups say, worked by harnessing the online world’s fascination with “buzzy” content that is surprising and emotionally potent, and tracks with popular conspiracy theories about how secret forces dictate world events.
Just read that above quotation again. Is it not delicious? Did the WaPo writer realize he was doing that? I can’t decide which answer I prefer.
Scott Alexander on Trump’s Alleged Racism
Someone posted this long post (is there any other kind?) from Scott Alexander in the comments a while ago. It is a simply PHENOMENAL refutation of what “everybody knows” about Trump being a flaming racist.
I didn’t read it until I was on a business trip and was stuck with my conscience and my phone (so I turned to my phone, naturally). But it was way better than I thought it would be, and it even keeps getting better in the post itself. Some excerpts:
This is just a tiny representative sample, but the rest is very similar. Trump has gone from campaign stop to campaign stop talking about how much he likes and respects minorities and wants to fight for them.
And if you believe he’s lying, fine. Yet I notice that people accusing Trump of racism use the word “openly” like a tic. He’s never just “racist” or “white supremacist”. He’s always “openly racist” and “openly white supremacist”. Trump is openly racist, openly racist, openly racist, openly racist, openly racist, openly racist, openly racist. Trump is running on pure white supremacy, has thrown off the last pretense that his campaign is not about bigotry, has the slogan Make American Openly White Supremacist Again, is an openly white supremacist nominee, etc, etc, etc. And I’ve seen a few dozen articles like this where people say that “the bright side of a Trump victory is that finally America admitted its racism out in the open so nobody can pretend it’s not there anymore.”
This, I think, is the first level of crying wolf. What if, one day, there is a candidate who hates black people so much that he doesn’t go on a campaign stop to a traditionally black church in Detroit, talk about all of the contributions black people have made to America, promise to fight for black people, and say that his campaign is about opposing racism in all its forms? What if there’s a candidate who does something more like, say, go to a KKK meeting and say that black people are inferior and only whites are real Americans?
We might want to use words like “openly racist” or “openly white supremacist” to describe him. And at that point, nobody will listen, because we wasted “openly white supremacist” on the guy who tweets pictures of himself eating a taco on Cinco de Mayo while saying “I love Hispanics!”
and
So the mainstream narrative is that Trump is okay with alienating minorities (= 118 million people), whites who abhor racism and would never vote for a racist (if even 20% of whites, = 40 million people), most of the media, most business, and most foreign countries – in order to win the support of about 50,000 poorly organized and generally dysfunctional people, many of whom are too young to vote anyway.
Caring about who the KKK or the alt-right supports is a lot like caring about who Satanists support. It’s not something you would do if you wanted to understand real political forces. It’s only something you would do if you want to connect an opposing candidate to the most outrageous caricature of evil you can find on short notice.
and make sure you consider this angle, if you dislike Trump and are really really sure he’s not just a jerk, but also a racist:
I don’t think people appreciate how weird this guy is. His weird way of speaking. His catchphrases like “haters and losers!” or “Sad!”. His tendency to avoid perfectly reasonable questions in favor of meandering tangents about Mar-a-Lago. The ability to bait him into saying basically anything just by telling him people who don’t like him think he shouldn’t.
If you insist that Trump would have to be racist to say or do whatever awful thing he just said or did, you are giving him too much credit. Trump is just randomly and bizarrely terrible. Sometimes his random and bizarre terribleness is about white people, and then we laugh it off. Sometimes it’s about minorities, and then we interpret it as racism.
Before closing, I have to mention one thing. In his zeal to prove how non-anti-Semitic Trump is, Scott Alexander gives a throwaway remark about Pat Buchanan:
Listen. Trump is going to be approximately as racist as every other American president. Maybe I’m wrong and he’ll be a bit more. Maybe he’ll surprise us and be a bit less. But most likely he’ll be about as racist as Ronald Reagan, who employed Holocaust denier Pat Buchanan as a senior advisor. Or about as racist as George Bush with his famous Willie Horton ad. Or about as racist as Bill “superpredator” Clinton, who took a photo op in front of a group of chained black men in the birthplace of the KKK.
Unfortunately, here Alexander has fallen prey to the same type of slander that says Trump is “openly white supremacist.” Here’s Wikipedia’s treatment of (part of) Buchanan’s book, Churchill, Hitler, and the Unnecessary War:
Buchanan claims that Hitler’s ambitions were confined only to Eastern Europe, and citing such historians as Ian Kershaw, Andreas Hillgruber and Richard J. Evans, states that Hitler wanted an anti-Soviet alliance with Britain.[46] Buchanan maintains that British leaders of the 1930s were influenced by “Germanophobia”, leading them to suspect that Germany was out to conquer the world.[47] Citing John Lukacs, Buchanan maintains that Operation Barbarossa was not part of any long-range master plan on the part of Hitler, but was instead an attempt by Hitler to force Britain to make peace by eliminating Britain’s last hope of victory – bringing the Soviet Union into the war on the Allied side.[48] Buchanan argues that the Holocaust only developed the scale it did because Hitler’s invasion of Poland and then Russia meant that he had within his control most European Jews, which would not have been the case otherwise. Buchanan argues that if Churchill had accepted Hitler’s peace offer of 1940, the severity of the Holocaust would have been immensely less.
Now let me ask you two questions:
(1) Does the above count as “Holocaust denial”?
(2) Can you totally see how some people would smear Buchanan as a “Holocaust denier” because of the above?
You’ve started down a great path, Mr. Alexander…keep walking.
P.S. This post was inspired by a libertarian whom I shared Alexander’s post with, but I don’t know if he wants me naming him.
Liberty Classroom CYBER MONDAY Special
(Don’t worry, if you ordered based on my Black Friday post at the “Master” level, then I’ll retroactively give you this bonus too. I’ll be in touch, but if you don’t hear from me in a few days, feel free to email me to make sure.)
OK I have been informed that there is still special Liberty Classroom discount pricing through tonight (Cyber Monday), ending at 11:59pm Pacific time. Use this link to order with me as the affiliate.
If you order the “Master” subscription, then as an added bonus I’ll mail you signed copies (made out to whomever you want) of:
(1) My book *Choice* which outlines Mises’ Human Action
and
(2) My book (co-authored with Doug McGuff) *The Primal Prescription* which explains what the heck happened with U.S. health care / insurance, and gives strategies for seceding from the system. Lots of predictions about ObamaCare in this book which are coming to pass before our very eyes (unfortunately).
So click this link to order your Master subscription to Liberty Classroom! There are great lectures on history, politics, and economics, from Tom, me, and other teachers. My Part II on the History of Economic Thought is coming in 2017.
P.S. There are different tiers of membership. To avoid confusion: This special offer from me about getting two signed books is only applicable to the “Master” level.
P.P.S. I have plenty of copies of *Choice* on hand, but depending on demand I might have a lag in getting the *Primal* books out. If you want to direct them to recipients for Christmas presents, that should be fine, but I’m just warning there might be a lag on the *Primal* books.
Recent Comments